International Workshop
on AFTA and the ASEAN EconomiesFebruary, 1998
Hanoi

The Role of Foreign Investment in the
ASEAN Financial Crisis and the Need for New Investment and Trade Strategies

by:Dr Christopher Reynolds
University of Brunei Darussalam

The Role of F-I in the financial Crisis of Asia

Introduction

The Asian currency crisis has sent shock waves through
all the economies in the region. No South East Asia (SE Asian) country
has been left unaffected. Indeed, several countries may experience the
effects of recession as economic growth stagnates and market opportunities
diminish.

While the issue of the financial crash concerns much
of SE Asia, it is of particular interest to ASEAN members as their leading
economies have been the hardest hit by as their economies have been devalued.
As an Association, there is an opportunity for ASEAN to seek anunderstanding
of the problems and to find mutually beneficial programs and policies
that may help member countries. ASEAN recognises thevalue of a regional
focus to social and economic wellbeing while maintaining respect for individual
sovereignty and policies regarding politicaland economic management. In
this regard, each country has its own story to tell and its own housekeeping
to perform. However, in endeavouring to find the reasons behind the financial
crisis and the ensuing economic downturn, perhaps one common thing that
lies at the heart of the crisis was the growth of foreign investment to
fuel their economic development and trade.

In attracting considerable foreign capital investments,
both foreign direct investment (FDI) and capital or portfolio investments,
Asian countries have enjoyed rapid economic growth for many years. In
1995, more than $60bil., or two thirds of all FDI flowing into the developing
world, came to East Asia1 From 1990 to 1996, foreign capital inflows in
Asia quadrupled, amounting to some $100bil. in 1996.2. During this time,
FDI was to be far outpaced by Foreign Capital Investments (FI) in portfolios
and loans. FI as a proportion of total capital inflows was approximately
80% for Thailand, 60% for Indonesia and 40% for Malaysia) . While FI has
been a necessary part of the growth formular, the financial crisis of
1997 and its continued turmoil exposed just how vulnerable Asia has become
to global financial sentiment and foreign capital volatility.

The extent of the dependency upon FI became obvious in
October 1997. Between October 20 –23, the Hong Kong Stock Market
suffered its heaviest losses ever losing 23% of its value in four days.
On October 24, it saw a further fall of 10.4%, spilling over to the New
York Stock Market where the Dow Jones Index drops 554 points, or 7%, its
largest single point drop in one day. From June to December 1997, currencies
across East Asia suffered devaluation against the US dollar at alarming
rates: The Rupiah fell from 3,500 to 19,000 to the US$, losing some 80%
of its value, the Ringgit dropped 55% and the Baht lost 55%. As the financial
situation worsened, the Rupiah fell 15% on January 5, and a further 18%
on January 8. While Malaysia seemed more stable, new figures on the extent
of short-term foreign debt released from the Bank of International Settlements
on January 3, was probable cause for a further 18% drop off the Malaysian
Ringgit.

Once the rapid withdrawal of foreign funds from Asian
began, it had disastrous effects upon the banking sector as domestic panic
set in with massive withdrawals of cash and a consequential currency crisis
that spread across the region. Local firms and private depositors alike
sought to flee the ensuring local currency problems and desperately tried
to hedge their losses by seeking the safe haven of the US dollar, which,
of course, further reduced the value of their domestic currencies.

The crisis and the ensuing review of bank borrowings
and loans has revealed that banks in Indonesia, Malaysia, Thailand, the
Philippines and Singapore have accumulated approximately US$73 billion
in bad debts, or about 13% of those countries’ economic output.
Josephine Jimeney, Senior Portfolio Manager for Montgomery Emerging Funds,
estimates that Asian companies have accumulated some $700bil. in debt
since 1992.

Short term loans, government guarantees and property
speculation had become a volatile financial combination leading to debt
fueled growth -and little real wealth creation. Asia has attracted extremely
large amounts of private investment capital but an oversupply of foreign
capital and the pegging of Asian currencies to the US dollar has ultimately
led market forces to correct the estimated over-value of Asian currencies
and economic worth.

The focus of the paper is on finance and trade strategies
for SE Asia. The concern lies with the effect of the Asian financial crisis
upon SE Asian international business. The thesis of this paper is to suggest
that the Asian crisis is also an Asian opportunity. Particularly ASEAN
countries have the opportunity to reassess the nature and value of their
economies and their mutual economic future as part of an emerging global
economy.

Properly dealt with, the finance crisis does not challenge
the underlying export growth strategies of Asia that have resulted in
years of growth.

Indeed, the economic welfare of ASEAN countries is now
dependent upon a renewed focus on real wealth creation through export
growth strategies and the management of financial services inducive to
foreign investment stability.

Why Did Asia Crash?

Over the past 10 year, annual GDP growth for the ASEAN-5
(Indonesia, Malaysia, Thailand, the Philippines and Singapore) has averagedclose
to 8 percent. The IMF reports that during the past 30 years, per capita
income levels increased five fold for Thailand, and four fold inMalaysia.
In Singapore, per capita levels are now higher than some industrial countries.
While Asia has grown with outstanding export performance, it has effected
growth across other parts of the world, with the US, for example, increasing
its exports from 15% in 1990 to Asiato 19% by 1996. South East Asia is
now responsible for almost 20% of the world’s exports. Truly, South
East Asia is now part of the world economy and accordingly part of the
global financial system that supports it.

While the ASEAN countries have been free to pursue their
own domestic policies and market opportunities, the influence of the new
era of theglobal economy has led to increased pressure on Asian countries
to introduce more responsive and responsible financial managementinfrastructure.
The currency crisis is an outflow of these growth tensions. Along with
world trade has come the injection of huge amounts of foreign capital
to fuel trade and development growth. ASEAN, as part of Asia, has become
inter-dependent with the rest of the world for its trade, but also it’s
finance. Still, in any language, foreign investment, FI, is a synonym
for OPM (Other People’s Money) and carries with it a concern for
good financial management. In this context of the global market, investors
have become increasingly interested in Asia’s domestic economic
and political activity and Asia is now experiencing the effects of globalization.

Indeed, the Asia crisis is somewhat unique as ‘crisis’
models go. It didn’t happen for all the usual reasons. First, all
of the governments of the victim Asian countries were more or less in
fiscal balance without runaway credit creation or monetary expansion.
Second, none of the countries had substantial unemployment or a need to
increase monetary flows. While governments and economic tensions are usually
involved in causing financial crisis, in the Asian situation, government
were only secondary players while the financial institutions took a leading
role. As Paul Krugman, of the Massachusetts Institute of Technology, suggests,
the Asian currency crisis was “… one brought on by financial
excess and then financial collapse.” He continues; “Indeed,
to a first approximation currencies and exchange rates may have had little
to do with it: the Asian story is really about a bubble in and subsequent
collapse of asset values in general…”

In hindsight, much of the crisis has been blamed on the
mismanagement of funds by Asian banks. The banks, however, while not negating
their role in the problem, need to be understood as playing a part in
a bigger picture of Asian development. In reality, the banks operate as
a conduit for the supply and demand for money and try to capitalise on
the exercise. Over 30 years of continued economic growth saw a shift of
economic gravity from the Atlantic to the Pacific as more foreign funds
sought the opportunities of high returns in Asia. The resulting over-supply
of money that followed led to a cavalier approach to fund management and
a boom-bust approach by banks making loans for high returns that led to
increasingly risky investments into Asian property markets.

The development of the context for the financial crash,
to varying degrees involved business, governments as well as the banks.
The core to the problem, US Treasury Secretary, Robert Rubin points out,
was the close links between governments, banks and corporations which
“led to fundamentally unsound investments by corporations funded
by unsound lending by banks”. He says that: “Their financial
systems lacked transparency, which masked the extent of the problem [and]
… had inadequate financial regulation and supervision… In
short, the essential underpinnings to a modern financial system were weak
or did not exist”.

In the early 1990s Asian governments sought to peg their
currencies. In the pursuing years, they moved to deregulate their financial
markets. These actions inspired the commercial banks to become active
borrowers of foreign money. Competition among banks in a context of government
guarantees and inadequate regulation, led not only to risky property development
loans, but long term loans fueled by short term bank funding in foreign
currency. In making loans in domestic currency, the banks exposed themselves
to the risk of currency depreciation and high current-account deficits.
As the value of domestic currencies dropped against the US dollar, the
cost of the foreign loans became more expensive and banks were left with
an inability to make required payments. In the face of failing government
guarantees, banks and their depositors were in a crisis.

The crisis emerged for two reasons: First the pegged
exchange rates gave a level of security to both the investor and the borrower
in their transactions and so they were less cautious than is usual in
their investments. When currencies depreciated in 1997 and currency pegsabandoned,
(Thailand abandoned its currency peg in July ’97, and Indonesia
followed in August) then foreign debt suddenly increased in real terms
and corporations and banks found themselves quite severely over-extended.
Second, with weakening property markets, developers were unable to meet
their debts. While domestic debt increased, repayment loan income was
in short supply. In both instances, the regulation of financial institutions
and foreign loans was at the centre of the problem.

Still, the crisis must be seen in the light of the growing
international economy. The crisis of foreign debt repayments by the banks
was theculmination of domestic economic and monetary policy with international
financial and economic pressures. Indeed, the financial crisis and the
pressures on governments to improve their financial and political infrastructure
can be understood as part of the growth pangs of emerging economies adopting
capitalism as the basis of their economic life. The wisdom of Asian monetary
policies during the early 1990s led a numberof countries to peg their
exchange rates to the US dollar. A sign of growing Asian economic strength,
it would seem. But as the US dollar started to appreciate against other
world currencies in 1995, Asian currencies became more expensive and Asian
countries were pricing themselves out of the European and Japanese economies.
In the context of an emerging Chinese economy, South East Asia faced stiff
competition with cheaper Chinese exports.

Paul Krugman has argued that the ‘Asian miracle’
was hollow and that government-bank guarantees and foreign investment
distorted the extent of real growth and wealth creation. The extent of
the foreign debt and the sudden withdrawal of foreign investment leaving
stock markets badly bruised testifies to the possible validity of such
a proposal. Yet, close examination of the actual events of the crash show
that much of the foreign investment was indeed Asian investment coming
in from ‘other’ parts of Asia and that the real disasters
were caused by regional loss of faith in SE Asian currencies.Along with
Japan, combined investment flows within SE Asia make up the majority of
al FI. The problem was not foreign investment but a lack of economic wisdom
as to how to manage, regulate and direct investments toward secure projects
by the host country. Still, as one economy, such as Japan or Korea, were
effected,so investments were withdrawn from others. All this si to sat
that investments, foreign or domestic, play an integral part in economic
growth: one effects the other.

In contrast to Krugman, Steven Radelet and Jeffrey Sachs,
of the Harvard Institute of International Development, suggests that there
is clearly a history of events that have led to the financial crisis and
can be clearly identified and resolved. While it may take two to three
years to improve the overall health of the banking sector, the crisis
underscores the need to take this time to institute proper regulation
and supervision of financial markets in order to create more stable growth
in the future.

Another point of view is that the crisis and its solution
can be understand simply in terms of credibility and investor confidence.
Not to negate anything that has been said, it is clear that foreign investment,
followed by domestic investment, was withdrawn as investors and depositors
lostconfidence in the banking system and in governments to correct the
problem. To a large extent, the financial crisis as such, was a decline
of confidence in local currencies themselves. What governments and financial
institutions now face is a problem of credibility. As economic and financial
infrastructure is improved and investors believe in the credibility of
banks and governments again, so their confidence will return followed
by their investments. Given that it is likely for foreign investment to
return to the market before domestic investment, it is that more important
for governments to pursue international favour.

Foreign Investment

While the nature of international money flows and the speed at which
money moves has changed, and changed the world economy in the process,
the relationship between economic growth and investment capital has
only become more apparent. Of particular significance is the steady
increasing flow of transnational money through Asia over the past 30
years. Indeed, South East Asia’s economic growth through exports
and trade has been fueled by large foreign investments.

From 1980-1995, the world stock of FDI (foreign direct
investment) increased from US$514bil. to $2,658bil. This included a rise
for ASEAN countries from $25.2bil.in 1980 to $168.8bil. in 1995: Almost
a 7 fold increase. Yet, based upon IMF figures, FDI is only 25% of all
foreign capital investments in ASEAN, with another 75% flowing as capital
portfolio investments. A net private capital inflow of some $700 bil.for
1995.

Not that these statistics represent a problem. They speak
of record high growth and exports for Asia and of the willingness of foreign
investors to be involved in foreign markets. It also indicates the growth
of capital investments, as portfolio investments, in the world economy.
The OECD countries, for example, have seen a steady increase in GDP and
export growth from 1985- 1995 of approximately 150% while FDI outputs
rose some 300%.

By way of definition, FDI usually refers to capital applied
to business developments, in the form of joint ventures or project development
and maintenance. It usually comprises investments providing foreigners
with more than 10% holdings in a business. In parallel, there are the
large amounts of foreign capital that flows in the form borrowings by
financial institutions and governments. Then, there are the capital or
portfolio investments (FI) which are applied, usually on the short term,
for dividend and interest returns. These make up much of the movement
of stock markets. FI is very volatile, as Asia has recently witnessed.

Yet, it is not just Asia that is the recipient of foreign
capital flows and FDI. Since the 1980s, the US became the world’s
largest recipient offoreign capital investment. In 1990, FDI had reached
a peak of $70bil. in the US. Still, this represents less than 30% of total
capital inflows for

that year. At the same time, the US was also the world’s
largest foreign direct investor with investments of $251bil. in 1985 rising
to $705bil in

1995.

Clearly, international monetary flows occur based on
private business initiatives and opportunities and not necessarily in
response to government policy or economic plans. International financing
has become bigger than any government. Foreign investments are seen as
vital to economic growth and trade development. Governments in general
welcome foreign investment as a source of capital and innovation. The
OECD reports of a recent study in Canada showing that for every C$1bil.
of FI, 45,000 new jobs were created. Similarly, a New Zealand Government
report shows that foreign investors reinvest 90% of their profits, employ
New Zealanders in 99% of the positions they create and pay New Zealanders
28% more than domestic firms.

Foreign Investment is not only an indispensable part
of the world economy but indispensable to national economic growth. Of
course, while FDI is very attractive to nation-state, FI appears less
understandable and less manageable or controllable. But it is there, in
every economy. For FI to return to ASEAN countries in the volume that
has been witnessed in recent years, than economies need to be not only
more accommodating but transparent and provide the sort of credibility
and security needed to attract and maintain funds.

The Impact of Globalisation

Trade and economic growth are now inseparable from the movement of
international finance. The flow of international finance has become
so extreme that trade and investment, Peter Drucker suggests, have become
integrated parts in the new world economy. While trade and investment
are growing fast and take up the attention of most market and economic
analysis, money and information flows outside of trade and investment
are growing faster. Drucker tells us that; “The centre of world
money flows, the London Interbank market, handles more money in one
day than would be needed in many months – perhaps an entire year
– to finance the ‘real economy’ on international trade
and investment”

In this context, investment across the world needs to
be seen as one aspect of international and transnational business. The
general trend towards globalization is being driven by the changes in
the way business is performed.

Alvin Toffler has suggested that the changes that are
taking place are so immense that they are actually creating a new civilization.
Where the agricultural era was replaced by the dominance of the industrial
era, so now the world is witnessing the emergence of the information age.
The flow and management of information now define the world economy. The
flow of money is preceded and controlled by the flow and management of
information. Toffler asserts that what is happening is nothing short of
global revolution. A quantum leap in social intelligence. He says; “…
we are the final generation of an old civilization and the first generation
of a new one.”

Addressing this issue, Drucker points out that the transformation
of organisations and business is not confined to the West. This is not
a ‘Western’ change of civilization, but the emergence of a
world civilization. Drucker agrees with Toffler that knowledge and management
of knowledge is the fuel for the emergence of a new world era. This change,
he points out, will bring tension as governments and society desire stability
and the new organisations and business relationships will want autonomy
and flexibility. By nature, modern business organisations are >destabilising
and ‘change’ is itself a factor in the business equation.
In particular, says Drucker, “Today’s world money flows have
become the great destabilisers.” Drucker suggests that for businesses
to be creative and survive they will need to be continuing to improve
on everything an organisation does all the time, what the Japanese call
kaizen – the need to improve the product, the service and the business
itself.

It is interesting that in writing in 1994-95, before
the financial crash, Drucker could see the sort of financial crisis Asia
has just experienced as naturally occurring because of globalising trends.
He says the destabilising effect of world money flows force “…
a country into ‘crash’ programmes – to raising interest
rates to astronomical levels, for instance, which throttle business activity,
or into devaluating a currency over night way below its trade parity or
its purchasing power parity – thus generating inflation pressures.”
In the new world era, the Asian currency and finance crisis was to be
expected. Asia had learnt that its economic future depended on export
trade and its integration into the world economy. Globalisation has not
been Asia’s enemy, to the contrary, the growth of the Asian economies
has demonstrated quite clearly that participation in the world economy
is the key to domestic economic growth and prosperity.

Crawford Falconer, writing for the OECD, suggests that
the trend of globalisation and the realisation that trade and investment
have become mutually complimentary, is leading to both the liberalisation
of trade and investment procedures and at the same time a international
desire toimplement some globally recognised agreements on a set of trade
and investment practice disciplines. In the global context, there is no
option to return to the protectionism and trade discrimination of the
past. For governments to move to instituting liberalised trade and investment
regimes is only to recognise the global business trends that have become
so apparent.

It is in this new era that the emphasis of the business
process moves from supply-side economics and supply-side marketing to
demand-side economics and demand-side marketing. The ‘customer’
in the new era is empowered by the vast availability of information and
choice in the purchasing decision. The impact of this for world trade
is that marketing becomes much more sensitive to emerging markets and
customer purchasing trends with the result of increased competition and
product specialisation. Demand-side marketing incorporates the ‘change’
factor into process of economics and is seen in what is commonly referred
to now as product life cycle: Products now have a half life, and will
be replace by a new version or different product as customer respond to
market options. In the global economy, production and sales are all now
part of regional and international production systems. Goods are produced
in one country, packaged in another and destined for several others.

Business management and marketing, as well as banking
and finance, are all changing at an alarming rate, a destabilising rate,
as the world economy takes form. ASEAN is experiencing some of these tensions
of worldwide relationship and worldwide business. There is no preventing
the kinds of changes that Toffler and Drucker suggest, there is only the
option to learn to manage the change.

The Positive Side of Recession for Asia - finding
the opportunity

The effect of the financial crisis is devastating for
Asia. In some way, probably every business in the ASEAN countries will
feel the effect of what has happened: and perhaps every citizen. The banking
sector has been alienated as international short term borrowing rates
are extreme and even letter of credit are denied or heavily scrutinised.
Money will be in short supply. Next, the cost of imports and foreign services
will have increased effecting both business costs and the cost of goods
and foods for the troubled countries as their buying power is devalued.
In trying to cut cost, both Indonesia and Malaysia have sent home probably
over 1 million expatriates to their home countries, and many projects
will be curtailed. The extent of the damage, however, can only be superficially
counted at this time in terms of financial loss and bank closures. (The
social cost and the effect of economic recession are incalculable at this
time) In Indonesia, 16 banks were liquidated and in Thailand during >December
1997, the closure of 56 finance houses meant the loss of US$19.7 billion
in assets. Indonesia now expects zero growth for 1998 with a 20% inflation
rate. Recession is stalking SE Asia. The economies that were doing so
well could now see declining growth rates with possibly up to two years
before they return to 4-5%. The slump could worsen as shock waves effect
the region and the worst hit economies drag the others down. The situation
could also effect the demand for SE Asian goods across the world. At least,
this is the worst scenario.Yet, there are those who would argue that the
writing was on the wall, and it was possible to see it all coming. Krugman
believed that the ‘Asian miracle’ was hollow; built on too
much foreign capital. Too much ‘hot money’ (invested in stock
markets) made the recipient countries vulnerable to international money
movements. But like Mexico and Chile, a mismatch of short-term debt and
foreign reserves, large current account deficits and overvalued exchange
rates, are all common features in SE Asia. Michael Porter, from the Harvard
Business School, suggested in March 1996 that massive rates of investment,
opportunistic business deals and the lack of growth strategies would slow
SE Asia from moving to the next level of economic sophistication. He suggests
that SE Asia could only continue to growth, on the basis of its current
industrial goods export strategy, for another five years before running
into real trouble. Porter’s thinking appears to be complimentary
to the thesis put forward by Toffler and then Drucker: The new information
era will demand a highersophistication of business, financial management
and economic growth strategies.

Still, the ‘recession’ may be over quicker
than the prophets of doom would have us believe; stabilising currency
rates, returned confidence in the political and banking systems, and reduced
spending on unnecessary and speculative projects, could all see foreign
investment return the markets to their high seasons within a year. Certainly,
SE Asian currencies are all undervalued and markets and currencies will
see a rise invalues as positive changes encourage the markets to stabilise.
A rebound was certainly evident in the case after the world stock market
crash of 1987. On the other hand, this may be ‘the recession SE
Asia had to have’. The problems may well not be just ‘short
term’ but reflect upon an entire way of doing business in Asia.
There is a genuine need to improve the governance of the financial sector,
build foreign reserves and make government and business more honest and
transparent. At the same time, the ‘recession’ is also a time
to reflect on the growth strategies that have built Asia and reassess
their value for the future.

In the context of Asia’s future development, Sachs is probably more
optimistic than most. He believes that the currency upheavals “reflect
short-term financial considerations rather than a long-term crisis of
regional growth.” He has no doubt in Asia’s economic future
and suggests that by the year 2025, Asia may account for 55-60% of world
income, with average per capita income throughout Asia rising to one third
that of the US. In 1965 the GDP per capita for the SE Asian countries
(Malaysia, Indonesia, Thailand and the Philippines) relative to the US
was at 10%. This rose to 21% in 1995, and is projected to rise to 45%
by 2025. The average growth rate for these countries from 1996 to 2025
is expected to be some 4.5%. Still, the argument is that growth rates
will decline for a developing nation as its costs of production and its
income rise in comparison to the US level. Countries with lower costs
and income are likely to attract more export opportunities than more developed
countries and therefore have a higher GDP growth rate. On this point,
Krugman and Sachs agree that economic growth is driven by capitalaccumulation
rather than by pure productive gains. Capital investment is a necessary
part of the growth paradigm and when seen as income, can indicate the
development growth rate of a country. In showing the relationship between
income and growth, Sachs suggests that the marginal productivity of capital
is likely to decline as the cost of production rises. For developing countries,
growth rates tend to decline gradually as theclose the income gap with
developed countries.

For example, where a country has an income level of one quarter of the
US, Sachs suggests, they would have a growth rate of approximately 2.8
percentage points above the US rate. If the US growth rate is 2%, then
the country in question would have a growth rate of 4.8%. This, Sachs
says, would give an equivalent aggregate GDP growth of 6.5 –7%.
As the income gap declines then so does the level of growth. Japan is
a case in point. Where it was presumed in recent years that Japan would
become the world’s leading economy, in reality, as its income levels
rose, and with it the cost of production, its growth rates tapered off.
In its simplest form, Sachs proposal makes logical sense: Countries with
cheaper exports are likely to do more trade than countries with high>cost
products. With devalued currencies comes devalued exports, making them
more attractive to international markets. Following Sachs’ GDP model,
it should mean that Asia is able to now grow at levels high than it has
been, simply by reducing real income ratios as against the US.

Accordingly, the opportunities for growth in Asia, given other improvements
and strategies, are excellent. The conclusion of this analysis is that
the financial problems of Asia could be seen as fundamentally growth related.
The rapid growth across Asia has been the result of capital growth and
productive investment. Investment spending has a legitimate place in growth
creation and, indeed, has been the major source of overall GDP growth
in Asia rather than purely productivity gains. While there was an over-availability
of capital and mismanagement generally of investment infrastructure, the
financial crisis will act to resettle and realign the Asian markets. Asian
countries will continue to grow and the high-income Asian countries will
grow at a slower rate than they have experienced over the past 30 years.

Trade Growth Trends

East and South East Asian
countries have used export-orientated programs to achieve economic growth
and industrial development. They have also demonstrated that it is possible
for poorer societies to substantially transform their economies and see
rapidly rising living standards for its

While theories behind Asia’s growth range from
Japan’s influence in the region to the role of foreign capital or
laissez-faire economics, all recognise the important contribution of export
expansion to development success. For Chow, however, the export drive
constitutes the majorfeature and causal factor to East Asia’s success.

Sachs holds the same opinion. He suggests that developing
countries typically lag many years behind the advanced countries, yet,
Asian countries have done exceedingly well at catching-up to the advanced
countries in the past two decades. This has not been achieved, however,
by following traditional theories of development. There has been no ‘big-push’
by governments, as witnessed in China and Russia, whereby a focused concentration
of resources is directed at achieving growth, nor has Asia succeeded by
‘import substitution’ programs implementing protectionist
policies to grow national and infant industries. Sachs suggests that their
growth was achieved through a ‘flying geese’ model. Developing
countries have tended to imitate the patterns of countries just ahead
of them. Sachs says the trick “…is to bring multinational
production enterprises and their technologies into the poorer economies
to link to the engines of growth of the advanced countries.” The
consequence of this approach is a paradigm of export expansion. Domestic
production and economic growth was linked to world market opportunities
and to involvement of foreign firms and foreign capital. Trade and investment
were complimentary, indeed, interrelated. The export expansion model,
or paradigm, is still the most appropriate for Asia. But, growth figures
demonstrate that it has been a changing focus ofthe export ‘product’
that has been behind the growth. Singapore, for example, moved from a
production dominance in primary products of 71% in 1970 to a dominance
in electronics and machinery of 58% in 1994. Similarly, Malaysia moved
from primary product dominance of 94% in 1970, to electronics and machinery
of 44%. If Asia is to grow, beyond the 5 year limit as suggested by Porter,
it will need to move toward a new sophistication of goods and service
export.

With this in mind, again, Peter Drucker provides some
insight. He suggests that managed trade is a delusion. The domestic economy,
specially in Asia, is responsive to the world economy. The only trade
development question to ask is ‘will this policy advance and promote
a countries participation in the world economy. Liberalisation of trade
policies and free trade itself can only advance such an approach. Second,
Drucker >would suggest that the wave of the future is predicated on the
trends of today. The question to ask is “what has already happened
that will make the future?” If only 5% of the US employment is in
agriculture, and 15% in industry and manufacturing, while the service
industry (including hospitality, banking, technology,) in the past decade
has now reached 70%, it seems there is an obvious current trend that reflects
theemergence of a new information age.

The key to SE Asia’s future is trade: The extension, innovation
and globalization of trade. Any improvements made to the banking system
mustbe done in the context of improving financial infrastructure for trade
and investment. Trade expansion, as a strategy of growth, will not only
continue to increase prosperity but bring a focus to domestic and regional
politics as new interrelationships and opportunities are created.

The ASEAN Response

All ASEAN
member nations have been effected in some way by the financial crisis.
For the most part, it will primarily be the responsibility of each of
the member nations to design policies and make their own adjustments to
stabilise and improve their economies. Having said that, there will also
be opportunities for ASEAN members to consider what regional and intra-national
programs and policies might be put in place.

Indeed, the financial crisis is an opportunity for ASEAN
members to consider the nature and value of their economies and the prospects
for mutual economic development. The crisis is an opportunity for ASEAN
to grow stronger. As a general overview there are four things ASEAN and
its member countries can do in response to the crisis and restore international
confidence in ASEAN economies

- Move to institute controls over the financial sector
- Seek to make government and business more transparent.
- Address the currency issue on a national and regional basis with the
aim
of creating less dependency on the US$.
- Improve intra-ASEAN trade and trade practices.

No doubt, others will be able to add to the list but these issues are
fundamental to future considerations in both national and ASEAN forums.
Still, one point, above all others, needs to be emphasised again; the
future of ASEAN’s trade growth will be dependent upon national,
regional, and global reasoning.

Controls For the Financial Sector

Paul Krugman points out that Asia’s crisis was
not brought on because economies were unsound but ‘…brought
on by financial excess and then financial collapse”. .In the first
assessment, the banking industry in SE Asia has appeared incompetent and
irresponsible and in need of restructuring. Further consideration of the
matter has shown how the banks got themselves, and their countries, into
the crisis and that liberalisation of the financial sector will allow
international banking competition and professionalism to develop in SE
Asia. In the wake of the crisis, there is now little choice; economic
and financial reform will take place for the leading ASEAN countries.
Behind much of the proposed changes stands the International Monetary
Fund (IMF). While the IMF appreciates the differences and similarities
in Malaysia, Indonesia, the Philippines and Thailand, its common approach
calls for substantial rises in interests rates to slow currency depreciation,
and forceful improvement of the financial sector.

Government and Business Transparency

The problem has been knowing where the government ends
and the corporation begins. It has become too common for opaque financial
systems to hide the true value of loans and debts as well as the extent
of government involvement in the support of corporate projects. While
the issues of government corruption and extensive and extended interrelationships
in government and business are hard to explore and explain, the point
is that it all needs to be cleaned up. US Treasury Secretary, Robert Rubin,
puts it succinctly when he say that the core of the problem has been the
“…close links between governments, banks, and corporations
[which] led to fundamentally unsound investments by corporations funded
by unsound lending by banks. Their financial systems lacked transparency,
which masked the extent of the problem.” It is not surprising that
as the IMF made demands for transparency, financial issues spilled over
into corporate relationships and then into politics. Thailand, followed
by Indonesia and then Malaysia, was reluctant to make decisions that could
effect corporate and banking wellbeing or disrupt the economic. IMF advise
and loan requirements seemed too harsh, too radical. There seemed to be
too much debt with no easy way to relieve the burden. But politics became
an issue in itself for these countries as they stalled in making decisions
or accepting the IMF’s help. While it may take up to 2 years to
make improvements to the finance industry in these countries, and for
governments to build confidence in their moral value, the optimistic view
is that once there is credibility again, foreign investment will return
very quickly and growth ratios will resume at their previous levels.

Currency Issues

There is a general recognition that the shortage of foreign
currency and, to be more precise, a dependence upon US currency has played
a major part in the financial crisis. It is understandable that there
is a common desire to reduce demand for foreign currency in trade and
to move away from dependency upon the US dollar. Encouraging ASEAN countries
to move away from this standard of exchange, even for intra-ASEAN trade,
can only help economic growth and decrease vulnerability to foreign currency
demands. In the wake of the crisis in 1997, the

ASEAN Heads of Government (HSOG) met in Kuala Lumpur
in December, 1997, and confirmed their commitment to increase trade-interactions
within the region as a way to overcome the currency devaluation problem
that ASEAN countries were suffering. It was agreed that intra-ASEAN trade
could not only continue as before, but increase as long as prices remained
competitive. Aware of the shortage of the funds problem that escalated
the currency crisis, the HSOG Meeting encouraged countries to consider
establishing appropriate ASEAN payment arrangements, allowing countries
to conserve foreign exchange. There are numerous suggestions regarding
currency regulation. One idea would be to create an AMF - an Asia Monetary
Fund. The idea here is to create a regional body that can make development
loans and monitor economic activity as well as stabilize currencies. Another
idea is to introduce a currency board for the region. Again, the idea
is to take a regional action to try and set exchange rates and prevent
the kind of rapid devaluation of currencies that has been experienced
in 1997 and 1998. While, such ideas may have merit, ASEAN will take its
time to find a suitable and mutually beneficial answer. At this time it
wants to recognise the role of the IMF to aid and support economic development
for ASEAN countries, and to support measures to strengthen the

IMF’s ability to respond to financial crisis. In
the context of the current need, the HSOG, at its December meeting, also
endorsed the proposal that the newly formed ASEAN Central Bank forum be
managed by a Select Committee with a permanent Secretariat. It is to work
closely with the Asian Development Bank to “…develop in close
cooperation with international financial agencies, a regional surveillance
mechanism that would emphasis preventative efforts to avoid the emergence
of risks that would precipitate a crisis.”

Improve intra-ASEAN trade

ASEAN countries have been growing at a excellent pace.
Total ASEAN exports have expanded from $296bil. for 1995, to $323bil.
for 1996, which represents an 9% increase, more than double the growth
in world trade. At the same time, intra- ASEAN trade grew much faster,
increasing from $68.7bil. for 1995 to $77bil in 1996, representing a 13.4%
increase. Although, currencies may have been overvalued and financial
management within ASEAN countries exposed the need for increased regulation
and growth strategies, ASEAN countries have continued to demonstrate the
strength and size of its export capacity.

The ASEAN Heads of Government Meeting in December, 1997,
reaffirmed its recognition of the importance of trade to ASEAN growth
and again showed commitment to the advancement of its intra-trade strategy.
The Meeting agreed that plans for the ASEAN Free Trade Area (AFTA), the
ASEAN Investment Area (AIA) and the ASEAN Industrial Cooperation (AICO)
scheme be accelerated to increase intra- ASEAN trade. It also felt that
further measures should be encouraged to increase the speed of goods in
transit. They felt these measures would increase intra-trade and further
integrate the ASEAN economies. An additional consideration for intra-ASEAN
trade would be the encouragement of countertrade. Given the existence
of a free trade zone and of enhanced trade flow, countertrade would certainly
increase trade and reduce the dependency upon foreign exchange. There
is no reason why various forms of countertrade, such as, counterpurchase,
offsets, buybacks, and switch trading, could not all be active in the
ASEAN region. This procedure has been popular for Asia in its international
for some time as Western countries were forced to buy Asian goods in return
for European or American goods. There is no reason why this practice,
in its various forms, could not be further encouraged for intra-ASEAN
trade. ASEAN is committed to implement AFTA and the HSOG Meeting in December
expressed its desire to see it actualised by the year 2003. The depreciation
of the ASEAN currencies has actually created favourable conditions to
increase ASEAN exports both within the region and internationally. The
HSOG Meeting believed that the economies of ASEAN countries remained strong
and that the implementation of AFTA would facilitate long term adjustment
of economies to enhance ASEAN financial resilience and make ASEAN countries
that much more attractive to FDI and FI. What is evident is ASEAN’s
commitment to develop regional strengths. An extension of this commitment
is the ASEAN 2020 plan – a partnership in Dynamic Development –
that will seek to forge closer economic integration within ASEAN. Under
such a plan, trade liberalisation, the free flow of investments, and free
trade, will move ASEAN in the direction of an economic union. From the
desire of nation states across the world to form regional unions, it would
seem that regionalism has become of itself anaspect of globalisation.
While the flow of information, services and finance are now bigger than
regional containment, regional groupings, whether in Asia, Europe or America,
offer political, economic and social benefits through cooperation. There
is no doubt that the sharing of resources, and developing human and economic
services will benefit ASEAN countries, and it would seem that ASEAN is
moving in that direction.

Conclusion

SE Asia’s continual growth and
international business has forced them to move from centrally planned
economies to market-responsive economies. In this broader explanation
of the region’s political and economic development, the financial
crisis of 1997-98 can be understood as another step in this direction.
SE Asian governments, along with businesses, are learning to participate
in global capitalism; although the nature of capitalism is itself changing
in the new information era. The journey over the past 30 years has produced
positive results for SE Asia and there is no reason to suspect that the
changes that occur in response to the crisis will be anything but positive.

The ASEAN Secretariat, in its 1998 Macroeconomic Outlook, believes that
the turmoil will not linger past the second half of 1998. The situation
is likely to help the recovery of export growth as well as slow down import
growth. For Indonesia, in particular, economic growth is expected to slow
down to 7.5 and 7.7%. Malaysia will moderate and will be about 8%, while
Thailand will slow to 2.3 % and Vietnam is expected to grow at 9 - 9.5%.
While these figures may prove to be optimistic, there is a good chance
that they may also prove to be right.

Still, ASEAN’s future lies beyond growth rates reflecting a process
of industrialisation and catch-up. Of course, developing countries will
develop quickly as investments seek to capitalise on export trade. ASEAN’s
future lies with moving beyond being ‘flying geese’ following
behind the trends of the leaders. While this works for SE Asia at present
and in the near future, in the long-term, it is not sustainable.

The consequence of the Asian crisis is the opportunity for ASEAN to reassess
and redirect its focus toward being a leader in the global economy. ASEAN
has the opportunity, as a regional body and as a collection of member
countries, to create new and enhanced trade growth strategies. That is,
trade strategies that are global in focus and are directed at meeting
global demands – growing demands, and new trends.

Both Porter and Drucker suggest that to think in terms of global economics
is to allow the future, rather than the past, to dictate the present course
of action. It is demand side economics and allows future market demands
or trends to create innovations in business in the present.

A Global Demand Strategy will allow for the development
of real value added wealth creation and not superficial overvalued economics.
It will mean moving to an era of innovations in production, service industry
development, and trade not based upon the trends and successes of other
industrialising Asian nations, but based upon current and future world
demands.

This can not be achieved over night. It requires serious
consideration. But then Asia has always been good at taking the long-term
view. In the meantime, and with prescriptions for restoring confidence
in ASEAN economies taking shape, Asian countries are likely to continue
to see rapid growth. The energy already exists for this to happen. Globalisation
is dissolving boarders as money and commerce seek international opportunities.
The best that government and regional bodies can do is to enhance and
support this natural growth.